Exchange Efficiency with Weak Property Rights

45 Pages Posted: 15 Oct 2012 Last revised: 16 Oct 2012

Date Written: July 26, 2012

Abstract

We show that the first welfare theorem obtains independently of the strength of property rights protection. In an exchange setting, a large class of legal rules (what we call generalized liability rules) are exchange-efficient. Included in this class are property rules (generalized liability rules with very large damages Ds), standard liability rules (generalized liability rules with Ds that track the owner's valuation), and even rules which afford possessory interests only very weak protection (generalized liability rules with very small Ds). This result corrects a previous misconception in the literature, and yields the provocative conclusion that strong property rights are not required for exchange efficiency.

Keywords: property rules, liability rules, efficiency

JEL Classification: K11

Suggested Citation

Bar-Gill, Oren and Persico, Nicola, Exchange Efficiency with Weak Property Rights (July 26, 2012). NYU Law and Economics Research Paper No. 12-35. Available at SSRN: https://ssrn.com/abstract=2161659 or http://dx.doi.org/10.2139/ssrn.2161659

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Nicola Persico

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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